- 1 June, 2015
On Sunday the Government announced a number of different property tax measures and processes to ensure that property investors pay their fair share of tax. This included the proposal of a ‘bright-line’ test to be introduced in order to tax any capital gain realised from residential property sold within two years of purchase. This would exclude property that is the sellers’ main home.
The inevitable question then has been how many properties are actually sold within this time period? So I’ve had a look.
If we extract all residential sales from 2014 we can then see how long each of those properties was held for. From those figures we can measure the capital gain realised, and following that we can estimate the potential amount of tax the Government can expect to raise from those sales. More on that later, but first the stats:
The media focus has understandably been on Auckland; however this tax change is a nationwide one, so we’ll check out the situation both Auckland and Nationwide.
There is a definite difference in hold period between Auckland and the rest of the country though – almost a third of Auckland sales are held for less than 5 years.
If we investigate further into this it’s quite clear there are signs of speculation in the Auckland market – when breaking the hold period into yearly buckets we see Auckland peak at less than 1 year while for the rest of the country it’s most likely properties are sold within 7-8 years.
So the new measures from both the Reserve Bank and Government certainly seem like sensible approaches to try and address Auckland’s rapid growth, mostly driven by Investors.
We can now take a look at the raw number of sales the Government’s new measures can expect to account for.
Of the 86 thousand sales in 2014, almost 10% (8,400) were held for less than 2 years. In Auckland the percentage is much higher – almost 15% of 31,000 sales.
Some of these properties will be the “sellers’ main home” so not liable for the tax and we estimate this to account for around 60% of sales (from our buyer classification data as well as Stats NZ Census owner occupier data).
So 40% of 8,400 sales nationwide give us a total of almost 3,400 properties that would be up for the tax.
Capital gain for those properties shifted in less than 2 years is $230m – taxed at an average rate of 30% is almost $70m per year.
We also need to remember that not all capital gain will be liable as cost paid for renovations need to be taken into account so this number would be scaled down further. This is because the renovations undertaken add to the capital of the property. For example if you bought an investment property for $500,000 and spent $50,000 renovating the bathroom and kitchen, then sold it a year later for $600,000 you’d only be liable for capital gains tax on the $50,000 profit.
And finally, some people will already be obeying the current tax laws which would be included in this amount, so again this figure will be scaled down.
Source: CoreLogic New Zealand Ltd 2015